Digital and the Geopolitics of Oil

19 Nov Digital and the Geopolitics of Oil

Oilis used by some nations to project influence and power, and is a national security concern for most others. How does digital innovation alter the oil-infused geopolitical landscape?

Oil Geopolitics

I was part of a workshop recently to discuss the geopolitics of oil. The conversation revolved around the decisions that OECD nations are making that impact the energy security profile of consumer nations, and the risks of future man-made catastrophic supply disruption. While it was not a direct focus, digital issues crept into the analysis, which gave me pause to consider a question: how is this wave of digital innovation playing into the geopolitics of the global oil industry?

If you don’t pay that much attention to the shadowy world of oil politics, here’s a short primer of the kinds of things that international oil analysts consider.

OPEC

OPEC, that club of oil exporting countries, is still a major player in the world of oil, shipping some 33m barrels every day. Sure, their share has drifted down to 30% of global supply, far from the heady days when 2/3 of every mile driven was supplied by nations most that westerners wouldn’t consider as holiday destinations. Team OPEC has its challenges—the Saudis and the Qataris are not on good terms at the moment, Venezuela is collapsing, Iran is again under sanctions, Iraq is slowly recovering from insurrection, and Libya is still straining from Muammar Gaddafi’s broken rule.

Because of OPEC’s importance to global oil markets, most nations treat OPEC countries with a good deal of latitude, despite the poor treatment of their citizenry (see Arab Spring), their attitudes towards women (Saudi Arabia only just let women drive), and the conditions of their imported foreign workers.

Putin a barrel

Over the years, Russia hasn’t hesitated to use its immense gas supply as a geopolitical tool. Gazprom has repeatedly cut off gas supply to Europe because it objects to the trade practices of the transit nation, Ukraine. Germany is highly dependent on Russian gas supply and has signed long gas supply contracts which sometimes makes it difficult for Germany to oppose with vigour some of Russia’s adventures.

Now Russia appears to be operating in concert with OPEC (making OPEC+ or perhaps ROPEC), a nifty trick since, in theory, Russia’s oil companies are supposed to be independent of the Kremlin (not). With Russian production at 11m barrels, ROPEC is more like 45% of global production, and therefore of considerable influence in global markets. With its increased geopolitical heft (OPEC has Russia’s back), Russia can more effectively apply pressure on its customers to agree to its policies and actions (such as military intervention in neighboring nations), or turn a blind eye to questionable behaviour of its partners (the disappearance of Jamal Khashoggi) in exchange for favourable trade terms.

Rising US production

The explosive growth of new US oil supplies from previously untamed shale has shifted the US, in the short span of just 5 years, from importer dependent on global oil supplies to the world’s largest single oil producer nation and a major oil exporter. US demand for oil has been flat for years, despite annually adding 15m new drivers to its market (that’s testament to the deep shift towards a fuel light service economy, the efficiency of engine technology, and changing consumer behaviour).

This shift in fortunes reduces the ability of oil supplier nations to the US from applying pressure on the US political system. It also means that US sanctions applied to nations like Iran do not sting the US domestic economy as much, which is better insulated from the global oil market.

Shifting demand

BP’s excellent energy stats highlight the flat demand in the OECD economies in addition to the US. So where is all the growth? China and other growing Asian economies. Supplier nations are all effectively fighting over the very large and attractive Chinese marketplace. Paradoxically, China’s government has made it clear their intent to move away from fossil fuels for energy to clean up their air (and as a side measure, reduce their dependency on US currency markets).

China, as a big oil importer but with a strong industrial policy towards clean energy, will be able to seek favourable trade deals with exporters, in exchange for market access.

Defending Trade

Historically, US dependence on imported oil translated into its self-imposed large defence expenditures to police global trade routes through the Gulf, the canals of Suez and Panama, the straits around Singapore and the South China Sea. That warm defence blanket helps Taiwan to keep its independence, Japan to maintain only a defensive military, Israel to exist, the Philippines to grow, and South Korea to hum along. With the US now oil independent, the defence industry needs a new bogey man. Enter China, stage Far East, and a fresh sanctions program.

Disciplining the unruly

A good way, some say, to bring rogue nations to their senses is to impose sanctions on them that deny access to international banking or markets for their products. This cuts off access to hard currency, and with nations like Iran highly dependent on its oil exports, a ban on Iranian oil really hurts. Conveniently, if you’re in the market to export oil, as is the US, sanctions are really good for domestic exporters who are able to step into markets suddenly vacated. There are curious parallels between ROPEC’s use of oil production to tame the neighbours and the US’s use of the global banking system.

Digital and Geopolitics

I can see digital playing increasingly into the geopolitical world of oil and with unpredictable effects.

Boosting Resource Understanding

It might not be in the best interests of national oil companies and governments to have their resource data accessible in cloud environments. That data has strategic value in situations where nations are potentially competing for market access or capital. For example, Australia, a major gas exporting nation, does not have a national database of subsurface information (resources being a state responsibility). A state, such as China, could gain strategic insight because of its ability to take a position in each of the oil and gas projects underway.

Monitoring Assets on the Move

Digital technology is enabling far better surveillance of oil assets from afar. Crude oil ships may all look alike to the untrained human eye, but with enough data to work with, artificial intelligence can learn to distinguish between crude carriers, whether loaded or unloaded, and based on speed and track, likely destinations. A common tactic by the unscrupulous, which is to turn off vessel tracking devices, can be met by having an artificial intelligence machine consume the overnight satellite video feed and identify the ghost ships. Sanctions will take on a whole new level of enforcement.

Similarly, the presence of construction equipment, such as cranes, or greatly increasing cars on site, or buses at facilities, could signal expansion or a turn around, the ideal time to apply trade pressure.

Enabling Technology Transfer

As more and more technology becomes cloud enabled and digital, that technology is more easily transferred or sold over networks without a trace, in violation of trade rules that may prohibit such sale and transfer. Eventually, blockchain solutions that enable tracking of digital assets will make it easier to detect such illegal activity. Other clever mechanisms could include a ‘call home’ feature for all software to secure a constantly changing secret code that unlocks the software.

Fuelling Cyber Incidents

The digital underworld has many markets for buying and selling hacks, identities, malicious code, Trojan horses and other bits of nefarious technology. This market activity provides another inexpensive toolset to enable geopolitical actors to press their advantage. Imagine a scenario where an oil exporting state actor hacks into its customers’ oil infrastructure. Monitoring customer product volumes can enable advantageous trade strategies. At another extreme, a state actor could disrupt power energy infrastructure and force its customer to purchase more expensive oil, a kind of ransom.

In the case of environmental activism, hackers could break into plant infrastructure, distort data flows from key sensors, and fool systems and human operators into taking incorrect actions. As infrastructure fails, regulators respond with more stringent supervision that ultimately blocks legitimate investments and prevents economically valuable projects from proceeding.

Shifting Currency Away from the Greenback

An intriguing digital innovation would be the adoption of a non-sovereign digital currency or stable coin to serve as the settlement currency for oil. This digital innovation could permanently shift the global reliance on the US dollar and the US banking system away to a neutral market participant. It would effectively neuter the ability of the US government to apply oil trade sanctions to nations it doesn’t like.

That is the concept behind the Venezuelan Petro, a crypto currency backed by Venezuela’s oil assets. Unfortunately, Venezuela has not engendered the kind of trust that is necessary to overhaul oil pricing and trade, but the possibility that China could help create such a currency should not be ignored.

Fingerprinting Oil

Crude oil has no DNA, but crude oil cargos often contain unique biological traces that contain DNA. These genetic markers can sometimes precisely identify the exact source and field from where the crude oil was pumped. Coupled with new digital tools that can rapidly process crude assays, and blockchain for recording the assays and originating cargos on a secure registry, oil can suddenly be traced through its lifecycle, much like how Walmart tracks pork in China.

Digital solutions may make it increasingly difficult for oil customers to purchase crude oil from states under sanction by removing the cloud of mystery around oil source.

Conclusions

The politics of oil will go on forever, so long as there’s a market. However, digital innovations will trigger adjustments in these geopolitical gyrations.